* 2011 margin outlook cut to 4.75 pct from 5 pct
* Problems persist at European facilities
* Q3 EPS $0.42 vs $1.14 a year earlier
* Sales rise 21 pct to $7 bln (Recasts with stock drop, analyst's comment. In U.S. dollars unless noted)
TORONTO, Nov 3 (Reuters) - Magna International (MG.TO) (MGA.N) reported a bigger-than-expected drop in quarterly earnings on Thursday and cut its operating margin forecast for the second time this year, sending its shares down nearly 8 percent.
Magna, one of the world's biggest auto parts manufacturers, lowered the outlook for its operating margin this year to about 4.75 percent from the already-lowered 5 percent it forecast three months ago.
"European margins continued to dog the company and deteriorated," said Canaccord-Genuity analyst David Tyerman. "Problems persist at certain interior and exterior facilities."
Magna's management has said the company expects improvement in underperforming European facilities in the second half of 2011, with further gains in 2012 and beyond.
"So far, that has not been the case," Tyerman said in a note to clients.
Magna said its earnings fell 62 percent to $102 million, or 42 cents a share, in the third quarter, reflecting ongoing weak performance and rising costs at its European operations and a one-time expense charge for selling an interior systems plant in Germany.
Without the 52-cent charge for the plant sale and a settlement on a patent infringement, Magna's earnings per share were 94 cents, below analysts' average expectations of 98 cents a share, according to Thomson Reuters I/B/E/S data.
Sales rose 21 percent to $7 billion.
"Improving results in Europe remains our top priority, and we will continue to take steps to address our underperformance in this region, and are making headway in many plants," Chief Executive Don Walker said on a conference call.
The company also cited operating inefficiencies, particularly at its interiors and exteriors systems business in Europe.
Walker said two facilities in Europe lost $37 million in the third quarter, but that the company expects smaller losses in the fourth quarter and into next year.
Magna's shares fell as low as C$33.16 on the Toronto Stock Exchange on Thursday morning, a loss of 7.8 percent. By mid-morning they were off their lows at C$34.65, but still down C$1.34, or 3.7 percent.
Before it reported its results on Thursday, Magna's shares were already down nearly 18 percent in the past three months
$1-$1.01 Canadian Reporting by Allison Martell in Toronto, Bhaswati Mukhopadhyay in Bangalore, and Nicole Mordant in Vancouver; Editing by Frank McGurty and Peter Galloway